Monday, January 20, 2014

Proto-quant Dean LeBaron On What To Do When There's Nowhere To Run, Nowhere to Hide

I was going to call him a paleo-quant but realized he's not that old.
From Jason Zweig at the Wall Street Journal:
New Warnings From an Investing Pioneer 
Nowhere to run, nowhere to hide — and no one to get unbiased advice from.

Judging by my inbox, that is how a lot of investors feel. U.S. and most international stocks, bonds and real estate are all at least moderately overpriced by historical standards; cash offers a negative return after inflation; and most market pundits have a vested interest in their advice.
For some forthright suggestions on how investors should think about today’s markets, I turned to investing pioneer Dean LeBaron, one of the most original and open-minded financial thinkers I know of. His motto has long been: “Look for the questions that are not being asked.”

He suggests following the money–the Chinese money, that is–and investing in Africa, Canada and Mexico. He also likes assets that could benefit if the Federal Reserve’s low-interest-rate policy backfires, such as gold bullion, raw land and inflation-protected bonds.

What makes Mr. LeBaron worth listening to?

As he likes to say, “If the choice is between being first and being best, being first is better.” Mr. LeBaron founded Batterymarch Financial Management in Boston in 1969, investing mainly in small-company stocks, an opportunity almost nobody else was yet interested in. Batterymarch also pioneered quantitative investing, which uses statistical analysis–not human judgment–to pick stocks. In the 1970s, he says, every employee at the firm had three computers: “We had 90 machines when many firms didn’t have one.”

In 1974, Batterymarch became one of the earliest firms to offer an index fund, the kind of autopilot portfolio later popularized by Vanguard Group. In 1978, long before most investors ventured overseas, Batterymarch began investing internationally; in 1987, the firm started investing in “Third World countries,” now called emerging markets.

Mr. LeBaron also invested in farmland decades before most asset managers did; he was among the first to put money into privatizations as Russia divested state-owned companies.

Mr. LeBaron sold Batterymarch to Legg Mason in 1995 for almost $60 million. He retired about a year later, but he certainly isn’t retiring. As unorthodox as ever, Mr. LeBaron, 80 years old, spoke to me this past week from his home near Sarasota, Fla.

For decades, the name of the game for investors has been to make as much money as possible. From now on, Mr. LeBaron thinks, the prime directive will be to “lose as little money as possible.”

He warns, “If we are in a transition period, then the person who is in the most danger is the one who has recently done well, because he’s done well on things that are about to change.”

In Mr. LeBaron’s view, the easy-money policies of central banks, including the Fed, have created what he calls “administrative markets”–in which prices are set at least partly by government policy rather than by market forces.

But, he worries, that can’t last forever. “In complex systems, the dynamics are predictable but the timing isn’t,” he says. “It’s like adding a grain of sand one at a time to a pile: You can’t tell when it will collapse, but you know it will.”...MORE